Saturday, October 16, 2010

Washington is and has been in uproar about the Chinese manipulating their currency, keeping the Yuan artificially low. Whether this is true or not is a matter of debate, but not the one I want to have. Let's just take for granted the idea that China is keeping the Yuan artificially low. Please China, I beg you, keep doing it!

Most of you out there think China doing currency manipulation is good for China and bad for the USA. Well, that's because you listen to the wrong people. Well gather around and let me tell you a story. (A prime skill I developed as an economist) So the Chinese are keeping the Yuan too low. Therefore, when they sell a product for $2 in the US, they get more Yuans back than if the market was allowed to act. Since Chinese businessmen pay their bills in Yuans, they realize rapidly that they can sell their widget for $1 instead of $2 still pay their bills and make a profit. Now, this sounds amazing! While before the widgets cost $2, they now cost $1. As consumers, we all rejoice. But wait tell us the big bad economists, what about the American toy makers? Well the American widget makers can't make their widgets for less than $2. So, we the consumers don't buy from the American widget makers as much anymore. So the poor American widget maker lays off poor American workers who are all very sad. Now, this is bad! As workers we cry. Well now look at the other effect. Because the price of widgets has gone down, the cost of living fell with it. So, employers can pay employees less cash and still make them as well off as before. This gives an opportunity to also drop other prices. So in the final count, you have some people in some industries that have lost their jobs or had their companies close down. But the cost of living has decreased for everyone dropping the cost of labor. In effect, when the Chinese artificially lower their currency, they subsidize your consumption.

Furthermore let's look at what happens in China. Currency devaluation requires selling lots of Yuan. Especially when you export that much. So, in order to do that, China has to print money. Which causes inflation. Inflation is quite painful. It discourages investment and saving. So the Chinese are kindly enough paying the price for our lower prices by paying higher prices themselves. Sure, some people in their export industry benefit, but everyone looses over there. So please China, keep screwing over your own population so I have a better standard of living!